Positive Australian Trajectory May Not Foreshadow AUD/USD Rebound
Optimistic developments in the economy throughout the second half of 2015 created a multitude of tailwinds for Australian policymakers after aggressive actions taken earlier in the year saw gains trickle down to the real economy. However, despite the positive momentum in employment and growth, risks in the housing sector combined with inflation below the Central Bank target may see policy remain accommodative for some time to come. This contrasts with rising speculation that the US dollar may be set for a turnaround even though key FOMC voting members have taken a dovish turn in recent comments. While US fundamentals continue to point to a sluggish recovery, investors clamoring for haven assets might shift gears away from yield towards quality in an effort to hedge against growing volatility, boding poorly for the AUDUSD pair.
Fundamentally Speaking
Although both countries are systemically important on a global basis, a side-by-side comparison of the US and Australia is challenging considering the substantial differences in scale and breadth of the economies. For one, Australia is heavily sensitive to the export economy, an area that has experienced substantial shrinkage over the last year especially due to substantial exposure to Asia. Exports to China account for 27.00% of the total, have fallen dramatically from 2013 highs, mainly due to reduced demand for key natural resources such as iron ore and coal. Although the rapid devaluation of the Australian dollar over the last year managed to offset the losses in trade and insulate the economy which grew by 2.50% on an annualized basis through the end of the September, the problem forward is commodity demand. Unless Asian economies are able to recover during 2016, the outlook for Australian interest rates is increasingly negative.
Across the Atlantic, US exports have also fallen due to a stronger dollar driving up the costs of American goods on a relative basis, denting demand. However, unlike Australia, the US economy is far more diversified and consumption dependent. Gains in job creation have seen the unemployment rate decline to 4.90% in the latest reading, compared with 5.20% in Australia, but more concerning in the US is inflation which remains well below the Federal Reserve’s target. While headline consumer prices in the land down under grew by 1.70% in 2015, the equivalent US figure was a paltry 0.70%, underlining concerns for policymakers and raising speculation that the Fed will have to reverse course in December. While ultimately this would be dollar negative, near-term the Dollar will likely see demand pickup as investors opt for perceived safety amid higher volatility.
Technically Speaking
From a technical perspective, the AUDUSD pair is trending at a pivotal point. While longer-term the downward trend remains firmly intact, on a near-term basis, weakness in the US dollar has seen the pair climb back modestly over the past few weeks, bouncing back from multi-year lows and trending higher in an equidistant channel pattern. Although the channel exhibits a bullish bias with Call positions ideally established near the lower channel line with the upper channel line as a target for exit, price momentum might be approaching a reversal point. A candlestick close below the lower channel line could be indicative of a downside breakout to be accompanied by renewed bearish price action in AUDUSD, necessitating Put positon. With the multitude of risks to the global economy and growing risk-aversion, traders may be keen to pare positions in the Australian dollar in favor of haven assets.
The Big Picture
The real upcoming risk factors for the AUDUSD currency pair remain developments unfolding in China and the potential for a change in policy from the Federal Reserve. While the Reserve Bank of Australia has promised it will maintain its accommodative stance, with expectations currently forecasting rates to hit 1.75% by the end of the second quarter, it does mean added downside for AUD. Near-term losses in USD might present attractive Call position opportunities in the AUDUSD pair, however, on a medium-term basis the trend is set to persist with most indicators pointing to further losses. With this in mind, traders with a longer view would be keen to take advantage of any further AUDUSD rally to establish Put positions targeting new multi-year lows.
Disclosure: None.